Never Throw Away Things, Including Investment Advice

“In the US there is fear that strong growth will ultimately cause inflation to accelerate… Elsewhere deflation worries are looming behind the corner (excess supply of goods in many sectors, no pricing power, high unemployment in Europe)… Japan and Europe need a strong dollar… US monetary is conducted on the edge of a knife but the risk of a sharp tightening is limited… The cyclical peak in bond yields will be lower than before… The low and declining risk free rate forces investors to take more risk… Equity indices have risen strongly in many markets… Equity markets are not cheap but not extremely expensive either… The cyclical context is positive for the earnings outlook in Europe”

Reading this you will hopefully consider this to be a good description of the market environment. If you disagree, it’s not an issue because actually, these bullet points come from a client presentation I have given close to 14 years ago, on 22 September 1997 to be exact, and which I found when cleaning up my attic during my holidays. The title of the presentation was “Are there still attractive investments?”. Flipping through it I thought it’s better to keep things for later use rather than throw them away.

During my holiday I had a similar feeling on another note when visiting some antique shops in Brussels in Rue Blaes (highly recommended). It was an interesting and frustrating experience, respectively to see how much beautiful furniture and decoration was on offer but also spotting many items I remember from my childhood. Sadly, at some point my family threw them away considering them outdated. Now they have become vintage and pricey. The same applies to old cars as is well known. With the benefit of hindsight as the saying goes, I should have convinced my parents to keep the car they were using in my childhood rather than getting rid of it. Not that it was anything special, but even this car would fetch a nice price today. The attentive reader will notice that in my analysis I do not take into account storage costs nor the opportunity cost, which distorts the outcome…

Going back to the world of investing, the fact that economic and market comments can be re-used if you store them long enough shouldn’t come as a surprise considering that the economy and markets move in cycles. What was more sobering to see was how many topics were still or are again valid today. Markets may be volatile at times but many phenomena are structural: ferocious competition putting a lid on structural inflation; counting on currency depreciation to boost growth; the quest for yield when monetary policy is easy; lingering worries about bubbles. The roots of many of the issues we see today go back many years ago. The consequences of the Great Recession and the way it has been addressed only make our investment challenge more daunting today than ever.

William De Vijlder

Vice - Chairman of BNP Paribas Investment Partners